I am continuously talking about dividends and how I am building my income portfolio around that philosophy. Dividend investing is one of the investing strategies among many other different styles of investing and trading strategies. In addition, I am a believer in two sides of a coin, I am a believer of black, while, and gray, and I am a believer in negative and positives.
Keeping with this, I am not dumb to believe that dividend investing is an ultimate panacea of all investing strategies. Anything that we do in our lives has two sides and we manage it in our own ways. Similarly dividend investing also has its dark side and unfortunately, it is often the focus in many discussions. We need to remove some of the myths associated with it and understand how it can be managed. Following is my attempt to bust some these myths associated with dividends.
We view dividends as are very small. Very low dividend yield (of the order of 1% to 3% only) is cited as being the main reason. It is said that these low yields do not even match the savings accounts interest rate of 7%.
Dividend yield is “dividends paid per share” divided by “stock price”. Now, if the stock price is over valued, dividend yield is bound to be low. If the stock is priced in excess of 20 PE ratio, dividend is bound to be lower than 2%. That does not necessarily mean that dividends have low yield. Stock price is governed by the market sentiment; it does not have any fundamental basis. If you choose to only look at high flyer stocks of the day, then you are bound to feel yields are less. This is addressed by investing in stocks whose dividend yields are based on fair value and earnings of the company. And not based on stock price on any given day, given week, or given year.
In addition, dividend investing is not about present yield. It is about what future yield (or your Yield on Cost) you will end up with. Does this bust the myth? Continue reading rest of this article…
Measuring Progress – Yield on Cost or Dividend Yield
Individuals need to set a goal in order to succeed at anything, including our individual investments. Logically, the next step is to determine how we are going to measure our progress. In the realm of investments, most the individual investors (if not all investors) look at annualized returns and compare it with benchmark index. Here in India investors either use BSE’s Sensex Index or NSE’s Nifty Index. In addition, based on multiple discussions I have with individual investors, many investors use percentage based capital appreciation or depreciation which is devoid of time concept i.e. no time scale is involved.
For example, investors love to say “I made 150%, 200%, or 2x or 3x, or 0.5x times my money”. I cannot comments whether this progress measurement is right or wrong because I do not know individual’s objective and/or risk profile.
Ironically, of the many folks I have talked to in last ten years, more than 95% of them have always increased their original capital. Well if that’s the case then who is loosing it? If nobody is loosing, then why the market is more than 50% down from its peak. I am digressing from the subject, so coming back to the topic of measuring our progress…… Continue reading rest of this article…